Weekly Market Wrap | 23 December 2022

Bank of Japan shocked financial markets by finally raising interest rates

For the past 20 years, Japan has kept interest rates at zero in its battle against deflation. However, this week Tuesday, in a shocking move, it has finally deviated from its stance. The Bank of Japan (BOJ) hiked interest rates from 0.25% to 0.5%.

Why the sudden move and why should you care?

Inflation in Japan was not as high as in many other parts of the world and hence it could accommodate low interest rates to spur economic growth. Unfortunately, inflation has been climbing and the October reading showed that the inflation has jumped 3.7% from a year ago.

Although it wasn’t as high as the US inflation rate of 7.7% (Oct), BOJ probably wanted to rein in inflation before it gets out of hand. The rate hike is just a small increment, as the current 0.5% is much lower than the 4.25%-4.5% range in the US.

How does this affect investors? 

First, the Japanese Yen (JPY) will strengthen. Following the rate hike announcement, USDJPY dropped about 4% in a day (which means JPY strengthened against USD).

This might signal the end of the JPY weakness. Those who have planned to go to Japan next year might want to consider buying JPY now. This is because JPY is likely to strengthen further if BOJ continues to hike rates and narrow the difference against the US interest rates.

As for investors, it doesn’t mean zero impact if you don’t buy Japanese stocks. The reason is that companies are more global now and a US company may also have exposure to JPY. If so, this is good news as their forex positions will improve next year.

That said, companies that are short JPY will face higher financing charges and decreased profits. Japanese exports would also get more expensive as JPY strengthens. This includes Japanese cars, electronics, and even Don Don Donki snacks.

Second, rate hikes are generally negative news for stocks. We have seen how the US stock markets were pulled down by rate hikes in 2022. Japan isn’t an exception. Nikkei 225 index has already declined as much as 3.6% in a day following the announcement. Japan’s stock market isn’t as popular as its soccer team in the World Cup to foreigners, but it is still the world’s third largest economy. Any changes in policy direction will have an impact on the rest of the world and we can feel it in our pockets one way or another.

UK Government keeps digging a bigger debt hole

The British government has just accumulated another 22 billion pounds in net debt. Like major economies such as the US, it has not been able to shrink its debt due to budget requirements and the need to keep propping up the economy by borrowing and injecting money into it. Let’s also not forget about the multitude of strikes in the UK right now and that mini-budget fiasco back in September that almost brought the whole economy down.

Why should I care?

The British government has only been in surplus – meaning it made more from taxes than it spent – a handful of times over the last 50 years. Naturally, that expensive habit could come back to bite. Fortunately, the UK is still above water for now: the country’s debt is worth about 100% of its economy, which puts it in a better spot than the US, France, Spain, Italy, and Canada.

2 Trending themes in the current markets

Theme #1: Chinese stocks

China’s economy and stock market have been hit by the country’s zero-Covid policies. But, easing restrictions even as cases continue to rise suggests a partial backtrack is possible. We also noted in an earlier article that China had finally begun to ease its Covid-19 restrictions. In fact, Goldman Sachs predicts that China could end its zero-Covid policies altogether in 2023. That plus the Chinese government providing fresh waves of economic support could make owning Chinese stocks a pretty attractive option, given valuations are still low. 

What could go wrong? 

The key risk here is that the government sticks to its zero-Covid stance for longer than expected, pushing any economic recovery further away.

Theme #2: Energy Focus

With capacity constraints, rising demand from China, and the US refilling its strategic reserves, there could be a positive outlook for the oil and gas industry in 2023. Alongside all that, there is also a general transition to cleaner energy sources and their potential to become a megatrend, boosting demand for metals like nickel, lithium, copper, and iron ore for years to come.

What could go wrong? 

Unexpected economic hits or slowdowns would likely dampen any demand, send oil prices down, and reduce the urgency in the global shift to alternative energy sources. Already, we are seeing backtracking of commitments from previously agreed ESG goals.

IndexLevel1 Week1 MonthFrom Jan 1 2022
S&P 500 (US Stocks)3,844-0.23%-4.5%-19.8%
Nasdaq 100 (US Tech Stocks)10,985-2.3%-6.5%-33.4%
CSI-300 (Chinese Stocks)3,828-3.2%1.9%-22.1%
Bitcoin (in USD)16,8022.2%1.3%-64.8%
Source: Google Finance, as of December 24th, 2022.

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